Which Dairy Margin Insurance Option Is Best?

June 16, 2014 07:51 AM

Dairy producers will have two program options under the 2014 farm bill: The margin protection program and livestock gross margin-dairy (LGM-dairy) insurance.

Midwest economists have pulled together a good description of LGM-dairy and then have compared it to the new margin protection program (which replaces the dairy price support and Milk Income Loss Contract program). You can read it here

In a nutshell, the margin protection program is a one-size-fits-all program that uses national milk and feed prices. LGM-dairy, on the other hand, allows producers to tailor their insurance program to their specific ration costs.

The margin protection program has its insurance premiums set for the duration of the farm bill; LGM-dairy premiums vary with market conditions and are actuarially fare. "The benefit of the actuarially fair nature of LGM-Dairy is that when projected margins are favorable there is an opportunity to lock in high margin levels," says John Newton, a University of Illinois dairy economist.

However, while USDA will make margin protection indemnity payments for the life of the farm bill and without limit, LGM-dairy premium subsidies are limited. When the subsidy limit is reached, LGM-dairy will be suspended until and if new funds are made available. "Therefore, when making a decision between MPP and LGM-Dairy you need to carefully access the likelihood of continuous LGM-Dairy availability compared to the guaranteed protection of MPP over the life of the Farm Bill," Newton says.

Along with Newton, Cameron Thraen, Ohio State, Brian Gould, University of Wisconsin, and Marin Bozic, University of Minnesota, provided analysis for the report.



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